The European Central Bank or ECB considers that the world may be past the worst of the coronavirus crisis. However, a return to the status quo appears unlikely.
“We probably have passed the lowest point and I say that with some trepidation because of course there could be a second wave," said ECB president Christine Lagarde during the online Northern Light Summit on Friday.
According to ECB, gross domestic product in the euro area dropped 16% in the first two quarters of the year. Still, the central bank anticipates recovery in the coming months as euro zone economies resume. The central bank forecasts a rebound of 5.2% in 2021, and 3.3% in 2022, after a contraction of 8.7% for the entire year.
Lagarde warned that economic recovery “is going to be incomplete and might be transformational.” She stressed that the world would not be the same after the coronavirus pandemic.
Some business models will find it difficult to exist and adjust to the new world. Meanwhile, other companies will be formed to meet the needs of a new reality, Lagarde said.
She noted that in a world where proximity might take over, “it is likely that trade will be significantly reduced.”
“We need to be extremely attentive to those that are most vulnerable,” she added.
The ECB revealed an expansion in size and duration of its emergency bond-buying program this month. The central bank pledged to purchase 1.35 trillion euros in government debt at least until June 2021.
Based on meeting minutes on Thursday, the ECB emphasized the effectiveness of its monetary policy to resolve issues raised by the German constitutional court, which stated in May that some aspects of the ECB’s policy were illegal.
During the meeting, policymakers claim that “there was ample evidence that the euro area economy would have fared much worse without the policy stimulus from asset purchases.”
Lagarde stressed that “central banks have responded massively to the challenge. There is no question in my mind that we need to use all tools available.”
New fiscal stimulus
European leaders are tackling a new fiscal stimulus based on a proposal presented by the European Commission in May to address the economic crisis. They aim to gather 750 billion euros from public markets. The original plan is to release 500 billion in the form of grants and 250 billion in loans.
Meanwhile, there are differences among the member states about this program. They will be discussing it again on July 17 at a physical meeting in Brussels, Belgium.
Lagarde said she is doubtful there will be a final agreement at the summit and more discussions may happen before new fiscal stimulus is deployed.
Economic contraction
In May, the European Commission says the continent will face 7.4% economic contraction in 2020.
The forecasts contain the initial estimates since European countries implemented lockdown measures due to the coronavirus outbreak. The European Commission said in February it may experience a 1.4% rise in GDP for the EU this year.
“While the immediate fallout will be far more severe for the global economy than the financial crisis, the depth of the impact will depend on the evolution of the pandemic, our ability to safely restart economic activity and to rebound thereafter,” Valdis Dombrovskis, vice-president for economic affairs said in a statement.
European governments are studying how to ease confinement measures after several weeks in lockdown. Italy, Portugal, Greece, Germany and Austria already started gradually reopening their economies.
